systems design: process costing - · pdf filezunit cost computed by job. job order costing ......

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Systems Design: Process Costing

M. En C. Eduardo Bustos Farías

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Types of Costing Systems Used to Determine Product Costs

Job-orderCosting

ProcessCosting

Many units of a single, homogeneous productflow evenly through a continuous productionprocess.One unit of product is indistinguishable from anyother unit of product.Each unit of product is assigned the sameaverage cost.

Many units of a single, homogeneous productflow evenly through a continuous productionprocess.One unit of product is indistinguishable from anyother unit of product.Each unit of product is assigned the sameaverage cost.

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Types of Costing Systems Used to Determine Product Costs

Job-orderCosting

ProcessCosting

Typical process cost applications:Petrochemical refineryPaint manufacturerPaper mill

Typical process cost applications:Petrochemical refineryPaint manufacturerPaper mill Fabricación de papel

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Differences Between Job-Order and Process Costing

Job order costingMany jobs are worked during the period.Costs are accumulated by individual jobs.Job cost sheet is the key document.Unit cost computed by job.

Job order costingMany jobs are worked during the period.Costs are accumulated by individual jobs.Job cost sheet is the key document.Unit cost computed by job.

Process costingA single product is produced for a long period of time.Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department.

Process costingA single product is produced for a long period of time.Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department.

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An Operational Process System

TabletingTabletingMixingMixing BottlingBottling

LoadingCountingCappingPackaging

LoadingPressingCosting

SelectingSiftingMeasuringBlending

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Quick Check

Process costing is used for products that are:a. Different and produced continuously.b. Similar and produced continuously.c. Individual units produced to customer

specifications.d. Purchased from vendors.



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Quick Check





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Job-Order CostingJob-Order Costing

Direct MaterialsDirect MaterialsDirect LaborDirect LaborApplied OverheadApplied Overhead

Job 206Job 206Job 205Job 205 Job 207Job 207

Estrella CompanyEstrella

CompanyManufacturing Costs

Finished GoodsFinished GoodsFinished GoodsFinished Goods Finished GoodsFinished Goods

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Process CostingProcess Costing

Direct MaterialsDirect MaterialsDirect LaborDirect LaborApplied OverheadApplied Overhead

TabletingTabletingPickingPicking BottlingBottling

Finished GoodsFinished Goods

Manufacturing CostsEstrella CompanyEstrella

Company

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Process Costing

DirectMaterials

Type of Product Cost

Dol

lar A

mou

nt

DirectLabor

Conversion

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.




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Process Costing

Type of Product Cost

Dol

lar A

mou

nt

Conversion

So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.

So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.







DirectMaterials

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Comparing Job-Orderand Process Costing

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold

Work inProcess

Direct MaterialsDirect

Materials

Direct LaborDirect Labor

ManufacturingOverhead


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FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




JobsJobs

Costs are traced andapplied to individualjobs in a job-order

cost system.

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct

MaterialsDirect

Materials

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FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




ProcessingDepartmentProcessingDepartment

Costs are traced and applied to departments

in a process cost system.

Costs are traced and applied to departments

in a process cost system.

Direct MaterialsDirect

Materials

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Characteristics of Process Costing

Characteristics of Process Characteristics of Process CostingCosting

Homogeneous units pass through a series of similar processes.Each unit in each process receives a similar dose of manufacturing costs.Manufacturing costs are accumulated by a process for a given period of time.

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Characteristics of Process Costing

Characteristics of Process Characteristics of Process CostingCosting

There is a work-in-process account for each process.Manufacturing cost flows and the associated journal entries are generally similar to job-order costing.The departmental production report is the key document for tracking manufacturing activity and costs.Unit costs are computed by dividing the departmental costs of the period by the output for the period.

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Equivalent Units of Production

Equivalent units are partially completeand are part of work in process inventory. Partially completed

products are expressed in terms of a smaller number of fully completed

units.

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Equivalent Units of Production

Two half completed products are equivalent to one completed product.

+ = 1

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.So, 10,000 units 70 percent complete

are equivalent to 7,000 complete units.

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Cost of Production ReportCost of Production ReportCost of Production Report

Unit InformationUnit InformationUnits to be accounted for:

Units in beginning work in process 0Units started and completed 24,000Units to be accounted for 24,000

Physical Flow Equivalent UnitsUnits accounted for:

Units 20,000 20,000 20,000Units in ending work in process

(25% complete) 4,000 1,000Units accounted for 24,000

Work completed 21,000

1.Analysis of the flow of physical units

2.Calculation of equivalent units

3.Computation of unit cost4.Valuation of inventories

(goods transferred out and ending work in process)

5.Cost reconciliation

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Unit InformationUnit InformationUnits to account for:

Units in beginning work in process 0Units started 24,000Total units to account for 24,000

Physical Flow Equivalent UnitsUnits accounted for:Units completed 20,000 20,000Units in ending work in process

(25% complete) 4,000 1,000Units accounted for 24,000

Work completed 21,000

ContinuedContinuedContinued

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Cost InformationCost InformationCosts to account for:

Beginning work in process $ 0Incurred during the period 168,000Total costs to account for 168,000

Divided by equivalent units ÷ 21,000Cost per equivalent unit $ 8

Cost accounted for:Goods transferred out ($8 x 20,000) $160,000Ending work in process ($8 x 1,000) 8,000Total costs accounted for $168,000

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Quick Check

For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?

a. 10,000b. 11,500c. 13,500d. 15,000


a. 10,000b. 11,500c. 13,500d. 15,000

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Quick Check


a. 10,000b. 11,500c. 13,500d. 15,000


a. 10,000b. 11,500c. 13,500d. 15,000

10,000 units + (5,000 units × 0.30) = 11,500 equivalent units

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Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

Costs for the periodEquivalent units of production

for the period

=

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Quick Check

Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period?a. $1.84b. $2.40c. $2.76d. $2.90


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Quick Check



$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

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PELICULA

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Equivalent Units of Production –Weighted Average Method

The weighted average method . . .Makes no distinction between work done in prior and current period.Blends together units and costs from prior period and current period.

Let’s see how this works!

Antes de

mezcla

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Weighted Average Example

Smith Company reported the following activity in Department A for the month of June:

Percent CompletedUnits Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900 60% 30%

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Equivalent units are calculated as follows:

Materials ConversionUnits completed and transferred out of Department A in June 5,400 5,400

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Materials ConversionUnits completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540

Equivalent units of Production in Department A during June 5,940

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900 units × 60% 540 900 units × 30% 270 Equivalent units of Production in Department A during June 5,940 5,670

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900 units × 60% 540 900 units × 30% 270 Equivalent units of Production in Department A during June 5,940 5,670

Equivalent units of production always equals:Units completed and transferred

+ Equivalent units remaining in work in process

Equivalent units of production always equals:Units completed and transferred

+ Equivalent units remaining in work in process

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BeginningWork in Process

300 Units40% Complete

EndingWork in Process


6,000 Units Started


MaterialsMaterials

5,400 Units Completed

5,100 Units Startedand Completed

5,400 Units Completed540 Equivalent Units 900 × 60%

5,940 Equivalent unitsof production

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6,000 Units Started


ConversionConversion

5,400 Units Completed

5,100 Units Startedand Completed

270 Equivalent Units 900 × 30%

5,670 Equivalent unitsof production

BeginningWork in Process


EndingWork in Process


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PELÍCULA

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Production Report

Shows the flowof units and coststhrough work in

process

Becomes thejob cost sheet

in processcosting

ProductionReport

Helps managerscontrol theirdepartments

Provides costinformation for

financialstatements

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Production Report

A computation ofcost per equivalent unit.

A computation ofcost per equivalent unit.

Section 1

Section 2

Section 3

Production ReportA quantity schedule

showing the flow of units and the computation of

equivalent units.

A quantity schedule showing the flow of units and the computation of

equivalent units.

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Production Report

A reconciliation of cost flows for the period,including:

Total cost for unitscompleted andtransferred from theprocessing department.Total cost for partiallycompleted unitsremaining in work inprocess.

A reconciliation of cost flows for the period,including:

Total cost for unitscompleted andtransferred from theprocessing department.Total cost for partiallycompleted unitsremaining in work inprocess.

Section 1

Section 2

Section 3

Production Report

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Production Report Example

Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.

Double Diamond uses the weighted averagecost procedure.Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.

Double Diamond uses the weighted averagecost procedure.Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

Formado y molido

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Work in process, May 1: 200 unitsMaterials: 55% complete. $ 9,600Conversion: 30% complete. 5,575

Production started during May: 5,000 unitsProduction completed during May: 4,800 units

Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900

Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.

Work in process, May 1: 200 unitsMaterials: 55% complete. $ 9,600Conversion: 30% complete. 5,575

Production started during May: 5,000 unitsProduction completed during May: 4,800 units

Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900

Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.

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Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400

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Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160

5,200 4,960


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Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900


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Section 2: Compute cost per equivalent unit


TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900 Cost per equivalent unit

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Equivalent units 4,960 4,900 Cost per equivalent unit 76.25$

$378,200 ÷ 4,960 units = $76.25

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Equivalent units 4,960 4,900 Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 ÷ 4,900 units = $72.75

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Section 3: Cost Reconciliation


Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31Total cost accounted for

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Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31Total cost accounted for

4,800 units @ $149.00

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Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100 Total work in process, May 31 19,475 Total cost accounted for 734,675$

160 units X $76.25

All costs accounted for

100 units X $72.75

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Operation Costing

Operation costing employs some aspectsof both job-order and process costing.

Conversion costsassigned to batches

as in process costing.

Conversion costsassigned to batches

as in process costing.

Material Costs Chargedto batches as in

job-order costing.

Material Costs Chargedto batches as in

job-order costing.

Job-orderCosting

Operation Costing(Products produced in batches)

ProcessCosting

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PELÍCULA

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Review exercise

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1.

Calcular las unidades equivalentes para el período actual utilizando el método depromedios ponderados.

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2. Calculate equivalent units andunderstand how to use them.

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Five Steps in Process Costing

Step 1: Summarize the flow of physical units ofoutput.

Step 2: Compute output in terms of equivalent units. Step 3: Compute equivalent unit costs.Step 4: Summarize total costs to account for.Step 5: Assign total costs to units completed and to

units in ending work in process inventory.

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Physical Units (Step 1)

Physical unitsFlow of ProductionWork in process, beginning 0Started during current period 35,000To account for 35,000Completed and transferred out

during current period 30,000Work in process, ending (100%/20%) 5,000Accounted for 35,000

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Compute Equivalent Units(Step 2)

Equivalent unitsDirect Conversion

Flow of Production Materials CostsCompleted and

transferred out 30,000 30,000Work in process,

ending 5,000 (100%) 1,000 (20%)Current period work 35,000 31,000

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Compute Equivalent Unit Costs(Step 3)

Direct ConversionMaterials Costs$84,050 $62,000

Equivalent units 35,000 31,000Cost per equivalent unit $2.4014 $2.00

Total production costs are $146,050.

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Summarize and Assign TotalCosts (Steps 4 and 5)

Step 4: Total costs to account for: $146,050Step 5: Assign total costs:Completed and transferred out

30,000 × $4.4014 $132,043Work in process, ending (5,000 units)Direct materials 5,000 × $2.4014 12,007Conversion costs 1,000 × $2.00 2,000Total $146,050

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PELÍCULA

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5. Lexguard Home Paiting

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FIFO Costing MethodFIFO Costing Method

Under the FIFO costing method, the equivalent units and manufacturing costs in beginning work in process are excluded from the current-period unit cost calculation. Thus, FIFO recognizes that the work and costs carried over from the prior period legitimately belong to that period.

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Estrella Company Mixing Department Production and Cost Data for October

Production:Units in process, October 1, 70% complete 10,000Units completed and transferred out 60,000Units in process, October 31, 40% complete 20,000

Costs:Work in process, October 1:

Direct materials $1,000Conversion costs 350Total work in process $1,350

ContinuedContinued

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Estrella Company Mixing Department Production and Cost Data for October

Costs:Current costs:

Direct materials $12,600Conversion costs 3,050Total current costs $15,650

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Step 1: Physical Flow Analysis

Units accounted for:Units completed and transferred out:

Started and completed 50,000From beginning work in process 10,000 60,000

Units in ending work in process(40% complete) 20,000

Total units accounted for 80,000

Units to account for:Units, beginning work in process 10,000Units started during October 70,000Total units to account for 80,000

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FIFO Costing MethodFIFO Costing MethodStep 2: Calculation of Equivalent Units

Units started and completed 50,000 50,000Add: Units in beginning work in

process x percentage to complete:10,000 x 0% materials ---10,000 x 30% conversion 3,000

Add: Units in ending work in process x percentage complete:20,000 x 100% materials 20,00020,000 x 40% conversion 8,000

Equivalent units of output 70,000 61,000

Direct Direct MaterialsMaterials

Conversion Conversion CostsCosts

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Step 3: Computation of Unit Cost

Unit direct materials costs = $12,600/70,000 = $0.18

Unit conversion costs = $3,500/61,000 = $0.05

Unit cost = Unit materials cost +Unit conversion costs

= $0.18 + $0.05

= $0.23 per ounce

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FIFO Costing MethodFIFO Costing MethodStep 4: Valuation of InventoriesCost of ending work in process:

Direct materials ($0.18 x 20,000) $ 3,600Conversion costs ($0.05 x 8,000) 400

Total $ 4,000

Units started and completed ($0.23 x 50,000) $11,500Units, beginning work in process:

Prior period costs $1,350Cost to finish ($0.05 x 3,000) 150 1,500

Total $13,000

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FIFO Costing MethodFIFO Costing MethodStep 5: Cost ReconciliationCosts to account for:

Beginning work in process $1,350Incurred during the period:

Direct materials $12,600Conversion costs 3,050 15,650

Total costs to account for $17,000Costs accounted for

Goods transferred out:Units, beginning work in process $ 1,500Units started and completed 11,500

Goods in ending work in process 4,000Total costs accounted for $17,000

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Estrella CompanyEstrella CompanyMixing DepartmentMixing Department

Production Report for OctoberProduction Report for October(FIFO Method)(FIFO Method)

Unit InformationUnits to account for: Units accounted for:Units, beginning work Units completed 60,000in process 10,000

Units started 70,000 Units, EWIP 20,000Total units to account for 80,000 Total units accounted for 80,000

Equivalent UnitsDirect

MaterialsConversion

CostsUnits started and completed 50,000 50,000Units, beginning work in process --- 3,000Units, ending work in process 20,000 8,000Equivalent units of output 70,000 61,000


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Costs to account for:Direct Conversion

Materials Costs TotalBeginning work in process $ 1,000 $ 350 $ 1,350Incurred during the period 12,600 3,050 15,650Total costs to account for $13,600 $ 3,400 $17,000

Cost InformationCost Information

Costs per equivalent unit:Current costs $12,600 $ 3,050Divided by equivalent units ÷70,000 ÷61,000Cost per equivalent unit $ 0.18 $ 0.05 $ 0.23


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Costs accounted for:Units transferred out:

Units, beginning work in process:From prior period $ 1.350From current period ($0.05 x 3,000) 150

Units started and completed ($0.23 x 50,000) 11,500 $13,000Ending work in process:

Direct materials (20,000 x $0.18) $ 3,600Conversion costs (8,000 x $0.05) 400 4,000

Total costs accounted for $17,000

systems design: process costing - · pdf filezunit cost computed by job. job order costing ......

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